The spectrum auction held in March 2015 witnessed cumulative bids worth Rs 1,098.74 billion. There was aggressive bidding by leading operators in circles where their licences were coming up for renewable. Industry experts share their views on the impact of the spectrum auction on the competitive environment of the industry, tariffs and service provisioning…
How do you see the market dynamics of the Indian telecom industry changing post the spectrum auction?
Gaurav Dixit
The Indian telecom sector is continuously evolving, and the recent auction will further expedite the process. The market dynamics are expected to decisively shift towards the top three operators. This auction will spur passive consolidation as large operators will be able to offer an even more substantial difference in quality of service (QoS) with more spectrum. This will further attract premium customers to their fold. The operational parameters of lagging telecom companies, such as ARPU or minutes of usage, were already lower than the market leaders by around 30 per cent, as premium users want to be on networks that have the promise of a better QoS. In addition, with top operators now having sufficient spectrum, they will be in a position to offer a full bouquet of services and further consolidate their competitive positions.
However, a significant amount has been spent on spectrum acquisition and despite the fact that the full costs do not have to be paid up front, the large spectrum payments are set to put an extra strain on balance sheets. This is expected to increase debt levels and operating costs, and have an adverse impact on funding future expansion. Operators will have to find innovative solutions to increase their revenue streams and fully leverage the advantage of their newly acquired spectrum.
Hemant Joshi
The recent spectrum auction has the potential to reshape the telecom industry. There was intense competition in airwave bidding, which lasted for 19 days through 115 rounds. Some players bought new spectrum and others tried hard to renew their existing presence and expand their network. Interestingly, out of 13 operators present in India, only eight participated in the bidding. The three leading mobile service providers committed Rs 854 billion, or nearly 78 per cent of the total spectrum revenue of Rs 1.1 trillion. This indicates that the incumbents are likely to dominate the market in the future. Further, aggressive bidding in the 800 MHz band shows the trend towards a data-oriented market.
Neeraj Katariya
Auction-led spectrum pricing has ensured that only competitive operators have been able to afford the renewal of their airwaves. Smaller players are either being priced out or restricted to a very few circles where they have a sizeable market share. This will eventually reduce competition in each circle.
Harit Shah
Following the latest round of auction, licences in most of the circles have been renewed and as a result, operators’ concerns regarding the continuity of their businesses have been addressed. Clearly, with the acquisition of additional spectrum, the incumbents are going to strengthen their position in the years to come. The industry is also expected to witness consolidation. The Indian telecom industry is a high-cost market and newer operators cannot compete effectively in this market without bleeding.
Which players have emerged as the net gainers and the net losers, and why?
Gaurav Dixit
The operators participating in this auction were bidding strategically and it would be unfair to pick a winner or a loser. They evaluated their business cases while bidding and ultimately settled for those circles and spectrum bands that suited them. However, the major achievement for players like Airtel, Vodafone and Idea Cellular was that they were able to hold on to their dominance in the 900 MHz band. Bharti Airtel managed to win back spectrum in all six circles where its licences were coming up for renewal in the 900 MHz band, and also in four new circles in the same band. Vodafone India won back its 900 MHz spectrum in six circles and added fresh spectrum in two new circles. Idea Cellular, which was under huge pressure as it was deriving more than 70 per cent of its revenue from the nine circles where its licences were expiring, won back its 900 MHz spectrum in all of them. However, Reliance Communications (RCOM) could only retain spectrum in the 900 MHz band in the Himachal Pradesh and Madhya Pradesh circles. It also managed to get spectrum in the Northeast and Odisha circles in the 1800 MHz band. Reliance Jio Infocomm Limited (RJIL), meanwhile, acquired spectrum in the 800 MHz and 1800 MHz bands for Rs 100.77 billion. This means it now has airwaves in the 2300 MHz, 1800 MHz and 800 MHz bands, which will help the company begin its pan-Indian broadband services in the near future.
Hemant Joshi
The Indian market is in a growth phase, and as it matures and consolidates further, the number of players is expected to come down. The incumbents have managed to reacquire their spectrum, thereby future-proofing their businesses for the next 20 years. However, other operators are trying to stay in business. Clear articulation of spectrum sharing rules and liberal merger and acquisition guidelines will not only expedite the consolidation process but will also be beneficial for the industry, consumers and the country.
Neeraj Katariya
Although I would not like to comment on individual operator gains or losses, the entire spectrum was sold at the higher end of the valuation range. Since the auction price has been committed for the next 20 years of business, the winners will be the ones that will be able to execute their operational strategies and gain/maintain leadership positions. Although all operators have paid a high price for these spectrum assets, some operators will struggle to monetise them. All of them cannot be market leaders.
Harit Shah
Bharti Airtel, Idea Cellular and Vodafone India have fortified their holdings quite substantially. In the previous auction, held in February 2014, Bharti Airtel and Vodafone India had been the biggest spenders. In the last round of the spectrum auction, Idea Cellular had not bought much spectrum because most of its licences were not up for renewal. However, this time around, with a substantial quantum of spectrum holding, it stands along with the other two operators as a big gainer. Reliance Jio Infocomm Limited (RJIL) is also in a strong position, having bought a large quantum of spectrum in the 1800 MHz band in the latest round of spectrum auction as well as last year.
Besides these players, other operators that participated appear to be net losers. For example, RCOM had to give up a substantial chunk of spectrum. Similarly, Uninor has not acquired additional spectrum. Even though the licences for new players will not be up for renewal for some time as they started out late, the fact is that they will have to buy back spectrum at some point of time. However, given the high-cost industry structure, it is going to be challenging for them to compete.
What will be the impact of the auction results on end-consumers, particularly in terms of service provisioning and tariff movements?
Gaurav Dixit
Even though spectrum prices have never been the single driving factor deciding tariffs, and competitive pressures also have to be taken into account, telecom operators had already resorted to tariff hikes on several occasions during the past couple of years to improve profitability. The hikes were carried out based on their competitive strengths in specific circles and were for both data and voice services. Now, after winning spectrum through competitive bidding, telecom operators are unlikely to absorb the impact of the higher spectrum costs, particularly in circles where they are in a strong position. They are likely to ultimately hike tariffs, which is expected over the next couple of quarters.
Hemant Joshi
The amount of money spent on acquiring spectrum is likely to have a direct impact on tariffs. It is not just the 2015 auction, the operators incurred heavy capex in the last two auctions as well. The return on investment is low because the ARPU in India is very low. The telecom minister has restricted the tariff to Re 0.13 per second. The QoS could improve as operators are likely to have more spectrum. However, the quantum of spectrum is still lower in comparison with global benchmarks. Voice and data tariffs are likely to increase to keep up with the high costs of spectrum acquisition.
Neeraj Katariya
Operators will try to pass on some of the additional financial costs to the consumers. However, at least in the short term, there will not be a very significant increase in tariffs given the competitive nature of the market. After paying a princely amount for spectrum, operators would like to invest in a high quality network and service infrastructure in order to attract high-ARPU subscribers. In spite of this, their ability to do so will be constrained by their highly leveraged balance sheets.
Harit Shah
The whole idea behind buying liberalised spectrum is to be able to expand services. For operators, the focus is definitely on data. While voice remains the major revenue driver, the fact is that data cannot be ignored. The industry will see more investments in this area. Tariffs are likely to go up by 5-10 per cent on average, leading to an increase in call rates of Re 0.30 to Re 0.40 per minute. However, on the pricing side, there could be a few surprises because RJIL is likely to compete aggressively.
What is the likely impact of spectrum outgo on operators’ balance sheets?
Gaurav Dixit
As per the final results of the auction, the upfront payment to be made to the government by telecom operators is around Rs 288.72 billion, which includes Rs 77.72 billion by Idea Cellular, Rs 78.32 billion by Bharti Airtel, Rs 68.17 billion by Vodafone, Rs 25.91 billion by RJIL, Rs 20.13 billion by Tata TeleServices, Rs 11.04 billion by RCOM and Rs 7.42 billion by Aircel. After these upfront payments, the balance amount needs to be paid in 10 equal annual installments after a two-year moratorium. A significant portion of these initial payouts is expected to be funded by debt, which will lead to further leveraging of balance sheets. However, the extent to which operators will be required to do so will depend on their ability to generate higher revenues from this valuable resource.
Hemant Joshi
The spectrum auction is going to increase the debt burden on operators. The sector already has a huge debt burden of Rs 2.5 trillion and it is expected to add around Rs 1,000 billion. It is likely to impact operators’ future investments in technology and innovation. The debt-laden telecom companies will be further leveraged as operators would have to pay the government annual instalments. As per industry news, the government has received around Rs 100 billion so far. Carriers had to pay 33 per cent of their final bid within 10 days of the conclusion of the spectrum auction and the remaining amount is to be paid in 10 annual instalments starting from 2017. This will make a significant change in their balance sheets and profitability, and cash flow would be adversely impacted by the payment of principal, interest and amortisation of spectrum cost. The asset turnover ratio is likely to deteriorate further.
Neeraj Katariya
The balance sheets of all operators will be close to fully leveraged after this auction. Operators have spent 1x and 3x of their annual earnings before interest, taxes, depreciation and amortization only on this round of auction. This will severely restrict their ability to invest in capital expenditure to improve network quality as well as service innovation.
Harit Shah
From an accounting perspective, this debt will be shown on the balance sheets. But from a cash flow perspective, there will not be much impact on the operators as they can pay the spectrum amount over time.
What should be the next step for the winners to leverage the maximum benefits from the acquired spectrum?
Gaurav Dixit
Telecom operators need to use the spectrum they have acquired to provide improved voice and data services, which will make their services attractive against competitors. This could also allow them to charge customers extra for premium services and help them generate higher revenues. Operators also need to focus more on value-added services and offer more specific data packs for popular mobile applications, which will lead to better profitability margins. Excess spectrum can also be monetised, subject to any policy change in spectrum sharing, which will help operators derive maximum benefits from this scarce resource.
Hemant Joshi
Improvement in QoS will play a major role in leveraging the maximum benefit from the auction. Operators need to acquire more customers and minimise the churn rate. The introduction of new technology and provision of services in Tier III cities and rural areas can help gain more customers. There is a huge potential for rural service expansion even with 2G technology. The Digital India project will also help in connecting with the rural population. Operators will play a critical role in providing last mile connectivity to consumers. Offering local content in regional languages will be the key to data service uptake.
Neeraj Katariya
Now that the spectrum auction winners have secured airwaves for the next 20 years, they should not shy away from incremental investments in network quality, service innovations and new digital-age products. They should consider playing a larger role in the Digital India initiative, and strive to play a central role in enabling internet of things-related services in India while continuing to consolidate.
Harit Shah
Data is going to be a key focus area for operators, with all the incremental investments going into the strengthening of data networks. In fact, more focus should be given to data in order to monetise 3G spectrum. At present, 3G revenues represent a small proportion of operators’ overall business. Since 4G is still at a nascent stage, operators’ focus will initially be more on expanding 3G coverage.